Economic Demand Response

1. Economic Demand Response Sheldon FultonExecutive Director, IPCAANovember 4, 2008

2. Outline • What is Economic Demand Response (DR)? • How is the Alberta electricity market unique? • What is the value of Economic DR? • What are the proposed objectives and activities of the Economic DR working group?

3. Overview of DR What is Demand Response (DR)? • DR is a mechanism to reduce demand in response to certain conditions Why DR? • To hedge against high market prices • To avoid significantly higher costs and waiting time required for additional generation investment • To provide “safety cushions” for system supply • To deal with reliability issues Who administers DR? • Generally administered by ISOs or other entities such as utilities, planning agencies and/or commercial corporations

4. Economic DR What is Demand Response (DR)? • DR is a mechanism to reduce demand in response to certain conditions Why DR? • To hedge against high market prices • To avoid significantly higher costs and waiting time required for additional generation investment • To provide “safety cushions” for system supply • To deal with reliability issues Who administers DR? • Generally administered by ISOs or other entities such as utilities, planning agencies and/or commercial corporations

5. Economic DR Objectives • Reliably predict uptake (MW) by hour • Compensate curtailment in an appropriate manner • Standardized and efficient measurement and verification • Full understanding and management of feed-back loops • A series of complementary DR Programs targeted at the various categories of Economic DR

6. Categories of DR • Load Shedding • Load Shifting • Distributed Generation

7. Voluntary DR • Participants are notified of need for demand curtailment and can select whether or not to curtail without commitment in advance • Participants are notified of the need for demand curtailment and must offer in specified curtailment proposals. Once offers are accepted, participants are obligated to curtail demand as proposed.

8. Contractual DR • Once participants have qualified for the DR Program they are obligated to curtail their demand on execution of the trigger signal. • Participants receive an “availability” payment for committed MWs and hours; must be consuming in order to receive payments

9. Demand Price Market Clearing Price MWh Zero bid offers The AESO Hourly Market Balances demand level by stacking up supply offers An energy offer is assumed to represent the marginal energy cost for a generator at a specific level of output All generators in the offer stack receive a uniform market clearing price

10. Market Scale Mismatch Cost Value 250 200 150 100 0 1000 900 800 700 600 SELLER BUYER Quantity Market is the interactions between groups of buyers (the demand side) and sellers (the supply side) Demand Price Supply

11. Automatic Day-ahead Load Segment Intermediate Peak Voluntary Mandatory DRValue Considerations Notice Period DR Reliability

12. Alberta Electricity Market

13. Alberta 2005 Ontario 2005 Comparative Markets 2005

14. Alberta 2006 Ontario 2006 Comparative Markets 2006

15. Alberta 2007 Ontario 2007 Comparative Markets 2007

16. Comparative Markets 2008

17. Increasing High Prices

18. Value of Economic DR

19. Value by 5% Increment - 2006

20. Value by 5% Increment - 2007

21. Value by 5% Increment - 2008

24. Alberta’s Price Signal

25. A Closer Look (April 9th, 2008)

27. Sub-Group on Economic DR

28. Scope of Work • Conduct market analysis to determine the value and appropriate timing and quantity of Economic DR; and • Conduct a consultation to develop product design alternatives, including design work on: contracts, pricing mechanism, and rules governing contract performance and pricing elements. • Design work would be completed as part of a comprehensive DR plan for the Alberta Market, giving consideration to costs to implement, benefits and impacts.

29. Sub-group Structure

30. Pricing Options • How would DR be priced? • Availability payments? • Utilization payments? • How does the remainder of load compensate the curtailed load? • Exercisable option contracts? • Price Insurance? • System benefit charge? • Alternatives?

31. Product Design • What would DR products look like? • Voluntary/Contractual? • Seasonality? • On-peak/Off-peak? • How is the value relationship between Economic DR and Reliability DR defined? • Product design work needs to occur in parallel

32. Key Factors for Commercial DR Product Design 1. Contract – Product to be transacted • What is being traded? • Who are the buyers and sellers? • Buyer’s & seller’ rights & obligations • Terms & conditions • 2. Pricing Mechanism – How is price determined? • How do buyers & sellers interact? • What is the “purpose” of the price signal? • How is pricing to be done? • Interactive bid-offer, auctions, competitive RFOs • What are the key pricing fundamentals? • What is the life time of the product being traded? • - Economic - Physical • 3. Rules governing contracts & pricing • What are the “rights” and “obligations” • - Of buyers - Of sellers • How is “delivery” achieved? • What constitutes “title transfer”? • What is the mechanism for measurement and verification? • Performance assurance • Transparency and disclosure of pricing

33. Questions? Please feel free to contact IPCAA at: • Sheldon.Fulton@IPCAA.ca / 403 966 2300 • Vittoria.Bellissimo@IPCAA.ca / 403 966 2700